Here Come The Lululemon Downgrades (LULU)

In a research note published this morning, JPMorgan analyst Brian Tunick downgraded shares of Lululemon to "Neutral" from "Overweight" and called the stock, "the ultimate show-me story.”

Tunick wrote that he initiated coverage on the stock with an "Overweight" rating, "based on the assumption that core demand for Lulu product remained intact in spite of growing competition and execution/public relation missteps in 2013."

With first quarter comparable store sales that fell 4% over last year, that demand may have dried up.

Canaccord and Baird also issued downgrades on the stock Friday.

In addition to its disappointing performance, Lululemon also has another problem on its hands: founder Chip Wilson.

Wilson owns 27% of the company and is the company’s largest shareholder.

Following the press release he issued Wednesday in which he criticized the company’s board, Wilson has become a full-fledged activist investor.

Activist investors, usually hedge fund managers or private equity firms, amass positions in companies and then agitate for change, ranging from changes on the company’s board to a sale of assets or the entire company.

Wilson stepped down as the company chairman in December, but his public disparagement of the board was the kind of tactic you might expect from an investor like Carl Icahn or Bill Ackman, not the company’s founder.

According to data from Bloomberg, Wilson’s net worth has declined by $1.1 billion as Lululemon stock has fallen about 38% year-to-date.

Along with its first quarter results, Lululemon initiated a $450 million share repurchase plan. JPMorgan views this as a positive, saying the company’s commitment to the longer-term value in shares is a positive. But for a growth company (Lululemon's sales more than tripled from 2010 to 2014), buying back stock is uncommon decision, and could be viewed as a preemptive attempt to ward off activists.

Tunick wrote that he needs, “to see greater signs of demand improvement or that the investment cycle is abating before once again getting constructive on [shares of Lululemon].”

Some Wall Street analysts may have stepped away from Lululemon stock for now, but don’t be surprised if someone else picks up what at least one analyst has put down.

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